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Financial Literacy and Retirement Planning in Switzerland

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Abstract

We use a representative survey covering 1,500 households to document the level of financial literacy in Switzerland and to examine how financial literacy is related to retirement planning. We measure financial literacy with standardized questions that capture knowledge about three basic financial concepts: Compound interest, inflation, and risk diversification. We measure retirement planning by the incidence of a voluntary retirement savings account. Our results show that financial literacy in Switzerland is high by international standards--a result which is compatible with the high ranking of Switzerland on the PISA mathematical scales. Financial literacy is lower among low-income, less-educated, and immigrant, non-native-speaking households as well as among women. We find that financial literacy is strongly correlated with voluntary retirement saving. Our results also show that financial literacy is correlated with financial market participation and mortgage borrowing.
Numeracy
Advancing Education in Quantitative Literacy
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Financial Literacy and Retirement Planning in
Switzerland
Martin Brown
Swiss Institute of Banking & Finance, University of St. Gallen7+<>38,<9A8?83=1-2
Roman Graf
University of St. Gallen<97+81<+0=>?./8>?83=1-2
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Financial Literacy and Retirement Planning in Switzerland
Abstract
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Introduction
Since the onset of the global financial crisis, financial literacy has come to the
forefront of policy agendas aimed at enhancing financial sector stability. Heavy
losses by retail investors during the crisis have led to renewed policies to protect
these investors from making ill-informed financial decisions. Limited financial
literacy is further viewed as one driver of delinquencies in the US (subprime)
mortgage market (Gerardi et al. 2010). Even before the recent turmoil in asset and
mortgage markets, policy makers in the United States and the European Union
(EU) showed a heightened interest in the relationship between financial literacy,
household investment, and household debt. Individual responsibility for
retirement planning and soaring levels of consumer debt have raised the question
of whether households have sufficient financial knowledge to make adequate
decisions on saving and debt and to manage their investments.
Mirroring the developments in the United States and the EU, household
finance in Switzerland is characterized by increased individual responsibility for
retirement planning, increased exposure of retail investors to complex assets,
exposure of mortgage borrowers to interest rate and housing price risk, and rising
levels of consumer debt.1 These developments are met by government policies to
enhance the protection of retail investors2 and borrowers.3 In addition, several
initiatives have been undertaken to promote financial literacy in Switzerland,
especially among the youth.4 Surprisingly though, no survey so far has
documented the level of financial literacy in Switzerland with internationally
comparable indicators for a representative sample of the population or has
1 Private indebtedness is especially considered to be a concern among the younger population in
Switzerland. In an online survey 38% of adult respondents between 18 and 24 years of age
reported having outstanding monetary liabilities (Streuli 2007).
2 In a report released in 2010 and a subsequent position paper published in 2012, the Swiss
Financial Market Supervisory Authority (FINMA) announced new guidelines regarding
information provisions and business conduct applicable to financial institutions. Those new
guidelines intend to strengthen retail investor protection, which is also the aim of current ongoing
revisions of the Federal Act on Collective Investment Schemes (KAG) and the introduction of the
prospective Federal Financial Services Act (FFSA). Both initiatives mirror the revision of the
MiFiD regulation in the European Union
(http://www.efd.admin.ch/dokumentation/zahlen/00578/02686/index.html?lang=en).
3 In 2001, Switzerland introduced a consumer credit law to protect households from
overindebtedness through interest rate caps and mandatory information exchange between credit
institutions. For details see http://www.admin.ch/ch/d/sr/22.html#221.214.
4 See Brown and Graf (2013) for an overview of financial literacy initiatives in Switzerland.
1
Brown and Graf: Financial Literacy and Retirement Planning in Switzerland
Published by Scholar Commons, 2013
documented how financial literacy is related to the financial behavior of
households.5 This paper takes a first step at filling that gap.
We examine whether households in Switzerland are equipped with the
financial knowledge necessary to plan for retirement and to make well-informed
investment and borrowing decisions. In a first step, we provide a description of
financial literacy in Switzerland and how it is related to the socioeconomic
characteristics of households. Following Lusardi and Mitchell (2011b) we
measure financial literacy using questions that capture knowledge about three
basic financial concepts: compound interest, inflation, and risk diversification. By
employing these standard questions we can compare the level and socioeconomic
determinants of financial literacy in Switzerland to that in other countries that are
part of the Organisation for Economic Co-operation and Development (OECD).
In a second step we relate financial literacy to retirement planning, as measured
by the incidence of having a voluntary retirement savings account. In robustness
tests, we examine the relationship between financial literacy and financial market
participation as well as between financial literacy and household debt (mortgage
loans, consumer loans).
We find that the level of financial literacy in Switzerland is comparable to
that reported by Bucher-Koenen and Lusardi (2011) for Germany and Alessie et
al. (2011) for the Netherlands. Each individual financial literacy question was
answered correctly by more than 70% of respondents, with half of the respondents
answering all three questions correctly. Compared to other OECD countries, this
level of financial literacy is high and thus compatible with the high ranking of
Switzerland in the 2009 Program for International Student Assessment (PISA)
mathematical scales (eighth out of sixty-five participating countries).
We find that female respondents, respondents with low educational
attainment, foreign nationals, and respondents with low income and wealth have
significantly lower levels of financial literacy. We further find that young and old
respondents are less financially literate than middle-aged respondents. This result
is driven by two countervailing effects: Knowledge about inflation is positively
correlated with age, while knowledge about compound interest and risk
diversification is negatively correlated with age.
Financial literacy is positively related to retirement planning. Respondents
who answer all three financial literacy questions correctly are 9 percentage points
5 Staeheli and Zobl (2008) examine financial literacy among predominantly young and well-
educated respondents but do not use the “standardized” financial literacy questions employed in
our survey. Similarly, Birchler et al. (2011) examine a representative survey of stock-market
participation of Swiss households. They relate stock market participation to self-assessed measures
of financial literacy but do not employ the “standardized” financial literacy questions employed in
our survey.
2
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more likely to have a voluntary retirement savings account than respondents who
do not answer all questions correctly. Financial literacy also correlates with
financial market participation and mortgage debt, while we find no such
relationship for consumer debt.
Related Literature
Our findings add to the growing literature that measures the extent of financial
literacy around the world and examines which segments of the population are
most or least financially literate. We confirm the findings of Alessie et al. (2011)
for the Netherlands, Almenberg and ve-derbergh (2011) for Sweden, Bucher-
Koenen and Lusardi (2011) for Germany, and Sekita (2011) for Japan. All these
studies document a significant income gap and gender gap in financial literacy.
We further confirm the relationship between financial literacy and age
documented by Crossan et al. (2011) for New Zealand, Fornero and Monticone
(2011) for Italy, Klapper and Panos (2011) for Russia, and Lusardi and Mitchell
(2011a) for the United States.
Our analysis contributes to the recent evidence on the relationship between
financial literacy and household financial management. We confirm the positive
relationship between financial literacy and retirement planning documented, e.g.,
by Bucher-Koenen and Lusardi (2011), Almenberg andve-derbergh (2011),
and Sekita (2011). We also confirm that financially literate households are more
likely to participate in financial markets, as shown by Van Rooij et al. (2011) for
the Netherlands and Yoong (2011) for the United States. We confirm the results
of Fornero and Monticone (2011), who find that households with a mortgage
display a higher level of financial literacy. Contrary to the findings of Lusardi and
Tufano (2009), McCarthy (2011), and Gathergood (2012), we do not find that
financially literate households are less likely to have consumer debt.
Data
Our analysis is based on survey data from 1,500 individuals age 20–74 from the
German-speaking part of Switzerland. The data were elicited by an international
market research company in April 2011 on behalf of the University of St. Gallen.
The survey was implemented with telephone interviews that lasted, on average,
fifteen minutes. Respondents were not remunerated for their participation in the
survey but were told that their responses would only be used for academic
research purposes.
The survey is representative of the population in terms of age, gender, and
geographic location. Self-employed respondents were screened out as the aim of
3
Brown and Graf: Financial Literacy and Retirement Planning in Switzerland
Published by Scholar Commons, 2013
the survey was to gather information on financial behavior of households only.
Respondents with insufficient knowledge of the German language were screened
out by the survey administrators. As a result the survey is not representative of the
population in terms of economic activity, nationality, or household income. In
particular, the survey undersamples the non-German-speaking immigrant
population and by doing so undersamples the low-income population and
oversamples the home-owning population.
The survey questionnaire includes the three questions on financial literacy
that were first developed for the 2004 American Health and Retirement Survey
(see Lusardi and Mitchell 2011b). The exact wording of the questions is as
follows:6
1. Compound interest
Suppose you have CHF 100 in a savings account, the interest rate is
2% per year, and there are no account management fees. After 5
years, how much do you think you would have in the account if you
left the money in the account: (a) more than CHF 102, (b) exactly
CHF 102, (c) less than CHF 102, or (d) don’t know/ no answer.
2. Inflation
Imagine that the interest rate on your savings account is 1% per year
and inflation is 2% per year. After 1 year, would you be able to buy
(a) more than, (b) exactly the same as, or (c) less than today with the
money in this account? or (d) don’t know/ no answer.
3. Diversification of risk
Which of the following investments do you consider to be less risky?
(a) an investment in stocks of a single company, (b) an investment in
a mutual fund, or (c) don’t know/ no answer.
The survey questionnaire further elicits socioeconomic characteristics from
respondents (e.g., age, gender, education, employment status, household income),
indicators of behavioral traits (risk aversion, time preferences), and information
on the number of banking relationships and the types of financial products used
by the respondent (e.g., retirement savings account, investment account, mortgage
loan, consumer loan). The appendix provides definitions and summary statistics
of all variables used in our analysis.
6 The questions were translated from English to German, as the survey was conducted in German
only.
4
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DOI: http://dx.doi.org/10.5038/1936-4660.6.2.6
Results
How Much Do Individuals Know?
Table 1 displays the answers to the financial literacy questions. The question
about compound interest was answered correctly by 79% of survey respondents,
while the question on inflation was answered correctly by 78% of respondents.
For the interest and inflation questions the share of incorrect answers (18% and
17% respectively) was substantially higher than the share of nonresponses (3%
and 4% respectively). Correct answers to the question on risk diversification were
slightly lower at 73%. This question displays a higher share of nonresponses
(13%) compared to the first two questions, but similar levels of incorrect answers.
Table 1 shows that responses to each of the three questions are robust to the
exclusion of the youngest and oldest respondents (below 25 years or above 65
years).
Table 1
Financial Literacy: Summary Statistics
Full sample
[n = 1,500]
Age 2565
[n = 1,297]
(in %)
(in %)
Question 1: Interest
More than CHF 102 (correct answer)
79.3
80.7
Exactly CHF 102
11.1
10.7
Less than CHF 102
6.9
6.3
Don’t know / refuse to answer
2.8
2.2
Question 2: Inflation
More
6.3
6.4
Exactly the same
11.1
11.2
Less (correct answer)
78.4
78.5
Don’t know / refuse to answer
4.2
3.9
Question 3: Risk
Investment in single stock
13.5
13.3
Investment in mutual fund (correct answer)
73.5
74.9
Don’t know / refuse to answer
13.0
11.8
Overall
Interest & Inflation correct
64.0
65.3
All correct
50.1
52.1
None correct
3.4
3.3
At least one don't know / refuse to answer
16.9
15.3
All don't know / refuse to answer
0.7
0.5
Table 1 shows that exactly 50% of the respondents in our sample answered
all three financial literacy questions correctly. The share of respondents who
could correctly answer all three questions is similar to that documented by
Bucher-Koenen and Lusardi (2011) for Germany (53%) and by Alessie et al.
(2011) for the Netherlands (45%). This is surprising given that our survey was
implemented through telephone interviewsin contrast with the survey for
Germany (paper and pencil) and the Netherlands (Internet)and that previous
5
Brown and Graf: Financial Literacy and Retirement Planning in Switzerland
Published by Scholar Commons, 2013
telephone-based surveys in OECD countries have been characterized by
substantially lower shares of respondents answering all questions correctly, e.g.,
30% as documented for the United States by Lusardi and Mitchell (2011a). The
comparatively high level of financial literacy in Switzerland may be related to the
high level of mathematical education at the primary and secondary school levels:
The PISA 2009 results rank Switzerland eighth among sixty-five participating
countries on the mathematics scale.7
The share of nonresponses in our survey is low. Table 1 reports nonresponse
rates of 3%, 4%, and 13% for the Interest, Inflation, and Risk questions
respectively.8 By comparison, Bucher-Koenen and Lusardi (2011) find
nonresponse rates of 11%, 17%, and 32% for the three questions. One potential
explanation for the low frequency of nonresponses in our survey is that the
financial literacy questions were posed at the end of a fifteen-minute survey that
asked detailed questions about respondents’ banking relationships and financial
behavior during the financial crisis. Thus by the time respondents were asked the
financial literacy questions they may have already been “warmed up” in terms of
reflecting on financial issues.9
Who Knows the Least?
Table 2 relates the financial literacy of respondents to the demographic indicators
age, gender, education, and employment status. See the appendix for definitions
of all variables included in the analysis.
Table 2 documents the usual hump-shaped relationship between age and
financial literacy. Respondents between 36 and 50 years of age have the highest
level of financial literacy, with 52% answering all questions correctly. By
contrast, in the under-35 age group (above 65 years) only 45% (42%) of
respondents answered all questions correctly. A closer look at the three financial
literacy questions reveals that the hump-shaped relationship between financial
literacy and age is driven by two countervailing effects: age is positively
correlated with knowledge about inflation, while it is negatively correlated with
knowledge about risk diversification. The youngest age group displays a similar
share of correct answers to the interest and risk questions compared to middle-
aged respondents, but they are less likely to answer the inflation question
7 See http://www.oecd.org/pisa/46643496.pdf. By comparison Switzerland ranks fourteenth on the
reading scale and fifteenth on the science scale.
8 Contrary to other papers, it is not possible to differentiate between “do not know and refuse to
answer.
9 Alternatively, the telephone interviewers may have repeatedly asked the questions or prompted
respondents. However, all interviewers received strict instructions not to prompt respondents and
random controls of interviews suggest that these instructions were followed.
6
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correctly. By contrast, the oldest age group displays higher shares of correct
answers to the inflation question than middle-aged respondents but is less likely to
answer the risk and interest questions correctly.
Table 2
Financial Literacy and Socioeconomic Characteristics
Interest
Inflation
Overall
Characteristics
Correct
(%)
DK (%)
Correct
(%)
DK (%)
Correct
(%)
DK (%)
All correct
(%)
At least
one DK
(%)
Whole sample
79.3
2.8
78.4
4.2
73.5
13.0
50.1
16.9
Age
35 and younger
78.7
3.6
63.9
9.5
77.5
11.8
45.0
19.5
3650
82.1
2.2
73.9
3.6
78.1
8.6
52.4
12.7
5165
79.2
2.1
83.0
3.2
70.7
14.5
49.1
17.0
Older than 65
72.8
5.4
84.0
3.5
61.5
21.4
41.6
24.9
Sex
Men
85.6
1.4
84.9
2.8
78.6
9.1
62.0
11.8
Women
73.5
4.1
72.5
5.5
68.8
16.5
39.3
21.6
Education
Primary or lower
secondary
62.9 10.5 64.5 0.1 53.2 29.0 26.6 34.7
Vocational
76.7
2.8
73.2
5.1
72.4
12.2
43.1
17.2
Upper secondary
79.4
2.9
78.7
4.4
66.2
18.4
44.9
22.8
Tertiary
87.5
0.0
90.2
1.7
82.5
8.6
68.9
10.2
Employment status
Employed
82.7
1.7
79.3
3.5
77.3
10.5
54.2
13.9
Not employed
70.4
4.7
68.2
7.3
69.1
15.0
41.2
20.6
Retired
74.2
5.2
85.9
4.2
61.5
22.1
41.8
25.8
Notes: This table presents the answers to the three financial literacy questions by age, gender, education, and employment
status of respondents. DK indicates that respondents refused to answer the question or didn’t know the answer. See the
appendix for definitions of all variables.
Table 2 documents a strong correlation between financial literacy and
education: Only 27% of respondents with primary or lower secondary education
as their highest degree answer all questions correctly compared to 69% of
respondents with a university degree. These results mirror the findings for the
Netherlands by Alessie et al. (2011). With respect to employment status we find
that respondents with wage employment have substantially higher levels of
financial literacy (54% all correct) than respondents who are not employed (41%)
and retired respondents (42%).
Table 2 confirms the significant gender gap in financial literacy that has been
documented in previous studies: Men outperform women on all three questions.
We find that 62% of men answered all three questions correctly compared to only
39% of women. In line with previous evidence (Lusardi and Mitchell 2011a) we
find that the gender gap in financial literacy is not only driven by a higher
frequency of incorrect answers but also a higher frequency of nonresponses. The
7
Brown and Graf: Financial Literacy and Retirement Planning in Switzerland
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share of women who indicate they don’t know an answer or who refuse to answer
at least one question (22%) is almost double that of men (12%).10
The Gender Gap in Financial Literacy
In Table 3a we examine two potential explanations for the substantial gender gap
in financial literacy. First, the within-household division of labor may imply that
women are less involved in financial decision making than men and are thus less
familiar with the basic financial concepts captured by our financial literacy
questions. Second, women may be less interested in financial matters than men.
To examine these two conjectures we conduct univariate tests.11
Table 3a
Financial Literacy: Exploring the Gender Gap
Dependent
variable:
All correct
(%)
Maritial
status:
single
Maritial
status:
other
Difference /
Diff in Diff
Dependent
variable:
All correct
(%)
Financial
interest: yes
Financial
interest: No
Difference /
Diff in Diff
Men
64.8
[n = 182]
61.0
[n = 531]
3.6
(4.17)
Men
64.9
[n = 530]
59.0
[n = 154]
5.8
(4.4)
Women
36.6
[n = 134]
40.0
[n = 648]
-3.4
(4.64)
Women
45.2
[n = 405]
35.6
[n = 329]
9.6**
(3.63)
Difference
28.2***
(5.47)
21.0***
(2.86)
7.2
(6.24)
Difference
19.7***
(3.21)
23.5***
(4.72)
-3.8
(5.72)
Dependent
variable:
At least one
DK (%)
Maritial
status:
single
Maritial
status:
other
Difference /
Diff in Diff
Dependent
variable:
At least one
DK (%)
Financial
interest: yes Financial
interest: No Difference /
Diff in Diff
Men 9.3
[n = 182] 12.6
[n = 531] -3.2
(2.77)
Men 8.9
[n = 530] 18.2
[n = 154] -9.3***
(2.84)
Women 26.1
[n = 134] 20.7
[n = 648] 5.4
(3.9)
Women 19.5
[n = 405] 22.8
[n = 329] -3.2
(3.02)
Difference -16.7***
(4.12) -8.0***
(2.19) -8.7*
(4.75)
Difference -10.6***
(2.22) -4.6
(4.00) -6.0
(4.28)
Notes: This table shows univariate difference-in-difference estimates for financial literacy measures (all correct, at least 1
DK) by gender, marital status, and financial interest of respondents. For example, the difference-in-difference estimator in
the top left panel shows whether the gender difference in the share of respondents who answer all questions correctly is
different among single respondents than a mong respondents with another marital status. DK indicates that respondents
refused to answer the question or didn't know the answer. Standard errors are reported in parentheses. ***, **, * denote
significance at the 0.01, 0.05, and 0.10 level. The appendix provides all variable definitions.
First, we estimate the gender effect separately by marital status (single vs.
other marital status). The results reported in Table 3a suggest that the gender gap
in financial literacy is stronger among single respondents than among married or
10 The finding that women are more likely to say that they don’t know an answer is compatible
with existing evidence on gender differences in overconfidence (Barber 2001).
11 The term univariate in this context relates to the fact that we do not control for other household
characteristics that may vary by gender and also affect financial literacy, e.g. household income.
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divorced respondents. Single women (compared to single men) are much less
likely to answer all three questions correctly and more likely to not answer at least
one question than women with other marital status (compared to men with other
marital status). These findings contradict the hypothesis that a low level of
involvement of women in household financial decision making is responsible for
observed differences in financial literacy.
Second, we estimate the gender effect separately for respondents who are
more (vs. less) interested in financial topics. Our financial interest indicator is a
dummy variable12 that takes the value one if the respondent reports that he/she
followed the financial crisis very closely or closely and takes the value zero if
he/she followed the crisis less closely or not at all. We find substantial gender
differences in this indicator: while 45% of male respondents report that they
followed the financial crisis closely, only 23% of female respondents did so. The
results reported in Table 3a provide no evidence that a lack of financial interest is
responsible for the gender gap in financial literacy. We find that among
financially interested respondents, the gender difference in the share of
respondents who answer all questions correctly (20 percentage points) is only
slightly weaker than for respondents who are less interested in financial topics (24
percentage points). Furthermore, Table 3a shows that among financially interested
respondents, the gender difference in the share of respondents with at least one
nonresponse (11 percentage points) is higher than for respondents who are less
interested in financial topics (5 percentage points). Interestingly, we find that men
and women who are not interested in financial issues have similar propensities to
not respond. This may suggest that men are only more confident (or
overconfident) in answering financial questions if they are also interested in
financial matters.
The Nationality Gap in Financial Literacy
We find a strong nationality gap in financial literacy: Only 34% of foreign
citizens resident in Switzerland answered all three questions correctly while 28%
did not respond to at least one question.13 By comparison, 52% of Swiss citizens
answered all questions correctly and only 16% did not answer all questions. One
obvious reason for the difference between Swiss and foreign citizens lies in their
German language skills. While households with insufficient German-language
12 In empirical economics, binary (or indicator or categorical) variables are typically referred to as
dummy variables. These variables takes the value of zero or one to indicate the absence or
presence of some categorical effect.
13 At the end of 2012 1.8 million of the 8.0 million residents in Switzerland had a foreign
citizenship (23%). The majority of the foreign citizens resident in Switzerland are citizens of the
European Union (1.2 million).
http://www.bfs.admin.ch/bfs/portal/en/index/themen/01/02/blank/key/bevoelkerungsstand/02.html
9
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knowledge were screened out of our telephone survey, language skills may still
vary substantially across the sample. Switzerland is populated by a significant
share of immigrants with German as their native language (immigrants from
Germany and Austria) as well as a significant share of Swiss citizens located in
the German-speaking area but with a different native language (Swiss citizens
from the French- or Italian-speaking regions or who are naturalized immigrants).
This unique constellation allows us to examine in more detail whether the
observed nationality gap in financial literacy is driven by citizenship (and
therefore potentially by the education system) or simply by language skills.
Table 3b compares the financial literacy of Swiss citizens vs. that of citizens
of other countries, conditional on their native language. Our results suggest that
citizenship per se cannot explain our observed nationality gap. We find no
statistically significant nationality gap in financial literacy among households with
German as their native language. Differences in native language also do not, per
se, induce a statistically significant gap in financial literacy: Swiss citizens
without German as their native language are just as financially literate as Swiss
citizens with German as their native language.
Table 3b
Financial Literacy: Exploring the Nationality Gap
Dependent variable:
All correct (%)
Nationality: Swiss Nationality: Other
Difference
/ Diff in Diff
Total
51.9
[n = 1,357]
33.6
[n = 135]
18.3***
(4.37)
Language: German
52.0
[n = 1,278]
46.3
[n = 67]
5.7
(6.26)
Language: Other
50.6
[n = 79]
22.4
[n = 76]
28.2***
(7.45)
Difference
1.3
(5.79)
23.9***
(7.71)
22.6**
(10.11)
Dependent variable:
At least one DK (%)
Nationality: Swiss Nationality: Other
Difference
/ Diff in Diff
Total
15.8
[n = 1,357]
28.0
[n = 135]
-12.2***
(3.28)
Language: German
15.4
[n = 1,278]
17.9
[n = 67]
-2.5
(4.54)
Language: Other
21.5
[n = 79]
36.8
[n = 76]
-15.3**
(7.23)
Difference
-6.1
(4.22)
-18.9**
(7.41)
-12.8*
(7.60)
Notes: This table shows univariate difference-in-difference estimates for financial
literacy measures (all correct, at least 1 DK) by language and nationality of respondents.
For example, the difference-in-difference estimator in the top panel shows whether the
nationality-gap in the share of respondents which answer all questions correctly is
different among respondents with German as their native language than among
respondents with another native language. DK indicates that respondents refused to
answer the question or that they didn't know the answer. Standard errors are reported in
parentheses. ***, **, * denote significance at the 0.01, 0.05, and 0.10 level. The
appendix provides all variable definitions.
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Table 3b does, however, document a strong difference in financial literacy
between immigrants with a non-German native language and the other three
population groups in our analysis (Swiss citizens with and without German as a
native language and immigrants with German as their native language).
Immigrants without German as their native language are 24 percentage points less
likely to answer all questions correctly and 19 percentage points more likely to
have at least one nonresponse compared to immigrants with German as their
native language. This finding may be driven by substantial differences in
education levels between immigrants from Germany and Austria, compared to
immigrants from Southern Europe. However, it may also be driven by the fact that
the actual German language skills vary more among immigrants than among
Swiss citizens.
Does Financial Literacy Matter for Retirement Planning?
In this section we relate financial literacy to retirement planning. Similar to
Fornero and Monticone (2011) we employ an indicator of actual retirement
savings rather than a measure of whether respondents have thought about their
financial needs after retirement (as in Alessie et al. 2011; Bucher-Koenen and
Lusardi 2011; Lusardi and Mitchell 2011a). Our retirement account indicator is a
dummy variable14 that takes the value one for households that report having a tax-
exempt voluntary retirement savings account under the third pillar of the Swiss
pension system. Our data document a high level of retirement planning among the
Swiss population, with 41% of respondents reporting that they have a voluntary
retirement savings account. By comparison, evidence from the 2007 US
Consumer Finance Survey and the 2010 Eurosystem Household Finance and
Consumption Survey suggests that only 35% of US households and 33% of euro
zone households have a voluntary retirement savings account (Bucks et al. 2009;
ECB 2013).15
Table 4 documents that respondents who plan for retirement are more
financially literate. Households with a retirement account are much more likely to
answer all three financial literacy questions correctly (60%) than households
without a retirement account (44%). The difference in financial literacy between
retirement planners and nonplanners is larger for the risk question (13 percentage
14 In empirical economics, binary (or indicator or categorical) variables are typically referred to as
dummy variables. These variables take the value 0 or 1 to indicate the absence or presence of
some categorical effect.
15 The popularity of tax-exempt retirement accounts in Switzerland may, however, be driven by
the fact that such accounts are frequently required by banks for indirect mortgage amortization and
are often used by younger citizens to save in a tax-efficient manner for a later property purchase
rather than for retirement.
11
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points) than it is for the interest question (8 percentage points) or the inflation
question (10 percentage points).
Table 4
Financial Literacy and Retirement Planning
Retirement account: yes
[n = 610]
Retirement account: no
[n = 890]
(%)
(%)
Question 1: Interest
Correct
83.9
76.1
DK
1.5
3.7
Question 2: Inflation
Correct
84.3
74.4
DK
2.6
5.3
Question 3: Risk
Correct
81.1
68.2
DK
8.7
16.0
Overall
Interest & Inflation correct
72.0
58.7
All correct
59.8
43.5
At least one DK
11.5
20.7
Notes: This table reports summary statistics for the three financial literacy questions,
comparing respondents with a retirement savings account to respondents without a
retirement savings account. DK indicates that respondents refused to answer or said
that they did not know the answer.
Table 5 examines the relationship between financial literacy and retirement
planning in a multivariate framework, controlling for household age, sex,
education, employment status, and income. We further include regional fixed
effects to account for differences in the proximity to financial centers as well as
differences in local school curricula. In column (1) we measure financial literacy
with the dummy variable all correct which is equal to one for respondents who
answered all three questions correctly and zero otherwise. In column (2) we
measure financial literacy by the variable number correct which measures the
number of correct answers of the respondent (03). In column (3) we include the
dummy variables interest correct, inflation correct, and risk correct which are
equal to one for respondents who answer the respective questions correctly and
zero otherwise. The reported coefficients in Table 5 are marginal effects based on
probit estimates.16
Table 5 results show that, even after controlling for differences in
socioeconomic characteristics, the relationship between financial literacy and
retirement planning is economically and statistically significant. The estimate for
all correct reported in column (1) suggests that a respondent who is able to
answer all three financial literacy questions correctly is 9 percentage points more
likely to have a retirement account. The estimate for number correct reported in
16 We chose a nonlinear estimation (probit) model rather than a linear model (OLS) due to the fact
that our dependent variable is a dummy (indicator, binary) variable.
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column (2) suggests that respondents who answer one more question correctly are
8 percentage points more likely to have a retirement account. The similarity
between the estimates in columns (1 and 2) relates to the fact that the
overwhelming majority of respondents either answer two questions correctly
(34%) or all three questions correctly (50%). Thus the indicator all correct mainly
distinguishes between these two groups, which differ only by one correct answer.
Table 5
Financial Literacy and Retirement Planning: Multivariate Analysis
(1)
(2)
(3)
Dependent variable
Retirement account
Retirement account
Retirement account
All correct
0.0900***
[0.0280]
Number correct
0.0776***
[0.0180]
Interest correct
0.0277
[0.0342]
Inflation correct
0.0893***
[0.0329]
Risk correct
0.107***
[0.0302]
Age: 3550
0.0379
0.0374
0.0347
[0.0337]
[0.0337]
[0.0339]
Age: 5165
0.0803**
0.0782**
0.0777**
[0.0389]
[0.0390]
[0.0395]
Age: Older than 65
-0.148**
-0.145*
-0.151**
[0.0751]
[0.0753]
[0.0749]
Sex: Women
0.01
0.01
0.01
[0.0295]
[0.0294]
[0.0295]
Education: Vocational
0.07
0.06
0.06
[0.0538]
[0.0543]
[0.0544]
Education: Upper secondary
0.119*
0.11
0.11
[0.0696]
[0.0700]
[0.0701]
Education: Tertiary
0.148**
0.134**
0.134**
[0.0591]
[0.0596]
[0.0596]
Employment: Not employed
-0.06
-0.05
-0.05
[0.0383]
[0.0386]
[0.0386]
Emploment: Retired
-0.109*
-0.114*
-0.111*
[0.0646]
[0.0643]
[0.0644]
Income: Middle
0.174***
0.167***
0.167***
[0.0319]
[0.0321]
[0.0321]
Income: High
0.286***
0.278***
0.279***
[0.0435]
[0.0438]
[0.0439]
Income: DK
0.0943*
0.0938*
0.0922*
[0.0503]
[0.0505]
[0.0506]
Estimation method
Probit
Probit
Probit
Canton fixed effects
Yes
Yes
Yes
No. of observations
1,500
1,500
1,500
Pseudo R2
0.11
0.11
0.11
Notes: This table reports marginal effects of probit estimations with retirement account as the
dependent variables. Standard errors are reported in brackets. Omitted categories for the displayed
explanatory variables are Gender: Male, Age: 2035 years, Education: Primary or lower secondary,
Income: Low. All regressions include regional fixed effects (per ca nton). DK indicates that respondent
refused to answer or said they did not know the answer. ***, **, *: significant at 0.01, 0.05, 0.10
confidence level. See the appendix for definitions of all variables.
13
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Column (3) results show that retirement planning is significantly higher among
respondents who answer the risk question (11 percentage points) and inflation
question (9 percentage points) correctly, but not for respondents who answer the
interest question correctly.
Considering our socioeconomic control variables we find the expected
relationship between household age and retirement planning: Respondents
between 50 and 65 years of age are more likely to have a retirement account than
younger or older respondents. We also confirm a substantial education and
income gap in retirement planning: Households with tertiary education and
middle or high income are more likely to have a retirement account than
households with low education and low income. Controlling for age, income,
education, and financial literacy we find no difference in retirement planning
between male and female respondents or between respondents who are employed
or not employed.
Table 5 establishes a positive correlation between financial literacy and
retirement planning. However, this correlation may not be causal. Ownership of a
retirement account may result in a better understanding of interest, inflation, and
risk due to exposure to information about financial products, financial advice
from bank employees, or discussions with friends and family about savings plans
and potential investments. Previous studies have used instrumental variables
estimation to identify a causal relationship between financial literacy and
retirement planning (see, e.g., Bucher-Koenen and Lusardi 2011; Alessie et al.
2011; Lusardi and Michell 2011a). Using an array of instruments, e.g., the
regional vote share for liberal parties, financial education in schools, parent
education, or the financial situation of siblings, these studies typically conclude
that the correlation between financial literacy and retirement planning becomes
stronger once the endogeneity of financial literacy is accounted for. In this paper
we refrain from presenting an instrumental variables analysis for lack of strong
instruments in our dataset.
Robustness
We provide two robustness checks to our analysis. First, following up on the
studies by Gathergood (2012) and McCarthy (2011) we control for behavioral
traits (risk aversion, time preferences) that may be correlated with financial
literacy and that may also affect the financial behavior of households and thus
their retirement planning. Second, we examine whether the observed correlation
between financial literacy and retirement savings carries over to other types of
financial behavior, i.e., financial market participation (as in Van Rooij et al. 2011)
and household borrowing (as in Lusardi and Tufano 2009; Gerardi et al. 2010).
Our survey elicited measures of risk aversion and time preferences which
have been shown to be correlated with financial literacy and financial behavior
14
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(Gathergood 2012; McCarthy 2011). The risk averse variable is a dummy variable
that takes the value one for households who report a low willingness to take risk
in their financial investments as indicated by a self-assessment of one or two on a
scale of one (no risk) to six (high risk). The myopic variable is a dummy variable
that takes the value one if the household fully or partially agrees to the statement
“I live for the present and don’t think about my financial future.” The impulsive
variable is a dummy variable that takes the value one if the household fully or
partially agrees to the statement “I am impulsive and tend to buy things that I
cannot afford.”17
In column (1) of Table 6 we replicate our analysis from Table 5 (column 1)
including our three measures of behavioral traits. The estimation model includes a
full set of socioeconomic controls and regional fixed effects, but for brevity we
report only the estimates for our indicators of financial literacy and behavior
traits. The estimate for all correct suggests that, controlling for risk aversion and
time preferences, a respondent who is able to answer all three financial literacy
questions correctly is 8 percentage points more likely to have a retirement
account. Importantly, the point estimate is only slightly lower than that reported in
Table 5 column (1). Thus it appears that the observed relationship between
financial literacy and retirement planning is not driven by an underlying
correlation of both with risk aversion or time preferences.
Table 6
Financial Literacy, Behavioral Traits, and Financial Behavior
(1)
(2)
(3)
(4)
Dependent variable
Retirement
account
Investment account
Mortgage loan
Consumer loan
All correct
0.0837***
0.169***
0.0953***
-0.01
[0.0287]
[0.0274]
[0.0301]
[0.00872]
Risk averse
-0.0605**
-0.150***
0.03
-0.00255
[0.0294]
[0.0289]
[0.0306]
[0.00900]
Myopic
-0.0906***
-0.0711**
-0.0699**
0.00013
[0.0301]
[0.0294]
[0.0319]
[0.00912]
Impulsive
-0.04
0.01
-0.05
0.0732**
[0.0530]
[0.0545]
[0.0575]
[0.0305]
Estimation method
Probit
Probit
Probit
Probit
Socioeconomic controls
Yes
Yes
Yes
Yes
Canton-fixed effects
Yes
Yes
Yes
Yes
No. of observations
1,457
1,457
1,457
1,396
Pseudo R2
0.11
0.13
0.18
0.19
Notes: This table reports marginal effects of probit estimations with retirement account, investment account,
mortgage loan, and consumer loan as the dependent variables. Standard errors are reported in brackets. All
regressions include a full set of socioeconomic control variables (see Table 5) as well as fixed effects per canton.
DK indicates that respondent refused to answer or said they did n
ot know the answer.***, **, *: significant at 0.01,
0.05, 0.10 confidence level. See the appendix for definitions of all variables.
17 See Tsukayama et al. 2012 for a discussion of domain-specific measures of impulsiveness as
implemented in our survey, i.e., the temptation to buy, as opposed to domain-unspecific measures.
15
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Not surprisingly we find in column (1) of Table 6 that impatient households,
as measured by myopic, are less likely to plan for retirement. By contrast, a lack
of self-control, as measured by impulsive, does not reduce retirement planning.
Rather surprisingly our results suggest that risk-averse households are less likely
to plan for retirement. This may be due to the fact that risk-averse households are
more likely to save in ordinary savings accounts rather than retirement savings
accounts, as the former have no restrictions on withdrawals. An alternative
explanation is that risk-averse households save through insurance solutions that
offer benefits in the case of unemployment, disability, or death.
Our survey elicited detailed information on the banking relationships of
respondents and the types of products held within each relationship. This allows
us to relate financial literacy not only to retirement planning but also to financial
market participation, mortgage borrowing, and consumer borrowing. In Table 6,
columns (24) we examine these relationships. We employ three indicators of
household investment and borrowing. The variable investment account measures
financial market participation and is a dummy variable that takes the value one for
households that report having a custody account with a bank for financial market
investment purposes. The variables mortgage loan and consumer loan measure
the incidence of secured and unsecured household borrowing, i.e., they are
dummy variables that take the value one for households reporting that they have
either type of loan.
Our data show a high level of financial market participation: 36% of
respondents have an investment account. By comparison, evidence from the 2007
US Consumer Finance Survey and the 2010 Eurosystem Household Finance and
Consumption Survey suggests that 18% (10%) of US (EU) households invest in
stocks and 16% (11%) in mutual funds (Bucks et al. 2009, European Central Bank
2013). Our data further document a similar level of mortgage borrowing
compared to US or EU households, but a much lower level of consumer debt. In
our sample 46% of households report having a mortgage, compared to 45% in the
US, 40% in the UK, or 43% in the Netherlands (see Crook 2006). The high
incidence of mortgage debt confirms that we are oversampling homeowners in our
survey, as in Switzerland only 40% of households own their own home.18 By
contrast, only 5% of our respondents report having a consumer loan compared to
49% in the United States, 34% in the UK, and 26% in the Netherlands. The very
low incidence of consumer debt in our sample confirms that we are
undersampling the low-income population with an immigration background due
to the screening out of respondents with limited German language skills. 19
18 http://drs.srf.ch/www/de/drs/nachrichten/schweiz/334700.quote-der-eigenheimbesitzer-auf-
rekordniveau.html
19 In Switzerland unsecured consumer loans are strongly targeted toward the low-income
immigrant population, as is evident from the fact that many consumer lenders’ websites (in
16
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Results shown in Table 6 reveal a significant positive relationship between
financial literacy, financial market participation, and mortgage debt. Respondents
who answer all three financial literacy questions correctly are 17 percentage
points more likely to have an investment account and 10 percentage points more
likely to have a mortgage loan. By contrast, we find no significant relationship
between financial literacy and the incidence of consumer debt. Our results also
show that household investment and borrowing is strongly related to risk attitudes
and time preferences. Risk averse and myopic households are less likely to invest
in financial markets. In line with evidence by Meier and Sprenger (2010) we find
that impulsive households are more likely to have a consumer loan.
Summary and Conclusions
In this paper we use survey data covering a representative sample of 1,500
households to document the level of financial literacy in Switzerland and to
examine how financial literacy is related to retirement planning. We find that by
international standards, financial literacy is high in Switzerland. This result is in
line with Switzerland’s high ranking on the mathematical scale of the 2009 PISA
tests. In line with recent evidence we find that financial literacy is substantially
lower among low-income and less-educated respondents as well as among
women. We also find low levels of financial literacy among immigrants,
especially those from non-German-speaking countries. We find that young
respondents are not generally less financially literate than the rest of the
population. While knowledge about inflation is low among the young population,
knowledge about risk or interest rates is not. This result confirms recent evidence
suggesting that—on averageSwitzerland’s young population is just as capable
of making sound financial decisions as the rest of the population (BFS 2012;
Henchoz and Wernli 2012). Mirroring recent evidence from other OECD
countries we find that financial literacy is strongly correlated with voluntary
retirement savings as well as with financial market participation and mortgage
borrowing.
Our findings support the view that public initiatives to improve financial
literacy may reduce the negative externalities of individual financial decisions on
contrast with banks websites) are presented in languages of low-income populations, e.g., Serbian
or Portuguese, in addition to German (see, for example, http://www.credit-now.ch/de/home/kredit-
credit-now/). Swiss households may be particularly reluctant to report the incidence of consumer
loans, as borrowing for consumption purposes is frowned upon in Swiss society. Karlan and
Zinman (2008) report that US households strongly underreport their use of consumer loans in
surveys. Aggregate data from the Swiss consumer credit bureau suggest that consumer borrowing
is much higher in Switzerland than the 5% reported in our survey. The bureau reports that at the
end of 2011, 454,576 consumer loans and 497,011 leasing contracts were outstanding compared to
an adult population of 6.4 million inhabitants (see http://www.zek.ch).
17
Brown and Graf: Financial Literacy and Retirement Planning in Switzerland
Published by Scholar Commons, 2013
society, e.g., the impact of inadequate retirement planning on the social welfare
system. However, it is less clear to which segments of the population financial
literacy initiatives should be targeted. In contrast with current practice in
Switzerland, our results suggest that financial literacy initiatives should not be
exclusively targeted toward the youth. Financial literacy policies should also be
targeted toward the low-income and less-educated populations and maybe
especially toward immigrant households from low-income countries. With regard
to the gender gap in financial literacy, our results provide limited guidance for
policy makers. They do, however, cast doubt on policies that aim to increase
women’s interest in financial matters, as strong financial interest does not seem to
close the gender gap in financial literacy.
Acknowledgments
We thank four anonymous referees as well as Urs Birchler, Emilia Garcia-
Appendini, Matthias Hoffmann, Annamaria Lusardi, Matthias Schaller, Manuel
lti, and seminar participants at the University of St. Gallen for helpful
comments. Moreover, we gratefully acknowledge financial support from the
European Investment Bank Institute through its EIBURS initiative. The findings,
interpretations and conclusions presented in this article are entirely those of the
authors and should not be attributed in any manner to the European Investment
Bank or its Institute. Any errors are the authors’ responsibility.
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Appendix:
Variables
Variable Description Obs. Mean Min Max
Financial literacy
All correct
1= answered all three financial literacy questions correctly.
1500
0.50
0
1
Number correct
Score of correct answers to all three questions (value: 0-3).
1500
2.31
0
3
At least 1 DK
1= At least 1 question was not answered, or respondent replied
"don't know."
1500 0.17 0 1
Interest correct
1= answered question on interest correctly.
1500
0.79
0
1
Inflation correct
1= answered question on inflation correctly.
1500
0.78
0
1
Risk correct
1= answered question on risk diversification correctly.
1500
0.73
0
1
Financial behavior
Retirement account
1= household has at least 1 tax-exempted voluntary retirement
account with a bank.
1500 0.41 0 1
Investment account
1= household has at least 1 investment account with a bank.
1500
0.36
0
1
Mortgage
1= household has at least 1 mortgage.
1500
0.46
0
1
Consumer loan
1= household has at least 1 consumer loan with a bank.
1499
0.05
0
1
Main socioeconomic controls
Age: below 35 years
1= respondent age between 20 and 35 years.
1500
0.26
0
1
Age: 3650 years
1= respondent age between 36 and 50 years.
1500
0.37
0
1
Age: 5165 years
1= respondent age between 51 and 65 years.
1500
0.26
0
1
Age: above 65 years
1= respondent age between 66 and 74 years.
1500
0.11
0
1
Gender: Women
1= female respondent, 0= male respondent.
1500
0.52
0
1
Education: Primary or
lower secondary
1= respondent who attended only primary or secondary school. 1500 0.08 0 1
Education: Vocational
1= respondent who attended vocational training.
1500
0.51
0
1
Education: Upper
secondary
1= respondent who attended grammar school (mittelschule,
gymnasium, seminar).
1500 0.09 0 1
Education: Tertiary
1= respondent with tertiary (university, FH) education.
1500
0.32
0
1
Employed
1= respondent who is employed for wages.
1500
0.69
0
1
Not employed
1= respondent works in household, is student or is unemployed.
Retired
1= respondent is retired.
1500
0.16
0
1
Income: Low
1= monthly household income below CHF 7,000.
1500
0.14
0
1
Income: Middle
1= monthly household income between CHF 7,000 and CHF
12,000.
1500 0.40 0 1
Income: High
1= monthly household income above CHF 12,000.
1500
0.14
0
1
Income: DK
1= respondents who refused to answer or said that they did not
know the correct answer.
1500 0.10 0 1
Other socioeconomic controls
Marital status: Single
1= respondents is single. 0= respondent is married, in a permanent
relationship, widowed or divorced.
1495 0.21 0 1
Financial interest: High
1= respondent followed the financial crisis closely or very closely.
1418
0.66
0
1
Nationality: Swiss
1= respondent with Swiss citizenship, = respondent without Swiss
citizenship.
1500 0.90 0 1
Language: German
1= respondent with German as native tongue: 0= other native
language.
1500 0.90 0 1
Risk averse
1= amount of risk the respondent is willing to take with his/her
financial wealth on scale of 1(no risk) to 6 (high risk) = 1 or 2.
1469 0.68 0 1
Myopic
Agree partially or fully to the statement “I live for the present and
don’t think about my financial future”.
1486 0.28 0 1
Impulsive
Agree partially or fully to the statement “I am impulsive and tend
to buy things that I cannot afford.”
1495 0.07 0 1
21
Brown and Graf: Financial Literacy and Retirement Planning in Switzerland
Published by Scholar Commons, 2013
... Анализ результатов проведенных обследований показывает, что уровень финансовой грамотности достаточно невысок. Более 50% респондентов, в том числе в США, допускают ошибки в ответах даже на самые простые вопросы базового уровня [13,[17][18][19][20][21][22]. Результаты ответов на более сложные вопросы продвинутого уровня свидетельствуют о слабой подготовленности респондентов к осуществлению операций на фондовом рынке. ...
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... The analysis of the results of the conducted surveys shows that the level of financial literacy is quite low. More than 50% of respondents, including in the United States, make mistakes in their answers even to the simplest basic-level questions [13,[17][18][19][20][21][22]. The results of the responses to more complex advanced-level questions indicate a weak preparedness of the respondents to carry out operations in the securities market. ...
... Based on the results of the test answers that assess the understanding of compound interest calculation techniques and the effects of inflation, it can be concluded that the level of financial literacy among Russians (65% correct answers on questions about compound interest and 57% correct answers on questions regarding the effects of inflation) is lower compared to citizens of the U.S. (76% and 81%) [12], Germany (78% and 82%) [19], Switzerland (78% and 79%) [20] and the Netherlands (77% and 85%) [18], but higher compared to citizens of China (57% and 50%) [21]. Unfortunately, other questions for testing financial literacy are not comparable to those used in foreign surveys. ...
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The paper examines the impact of financial literacy, risk tolerance and expectations on the choice of financial instruments by private investors using data from the 5 th wave of the All-Russian household survey on consumer finance, conducted in 2022 at the request of the Bank of Russia. This is the first time such an analysis using Russian data has been carried out. The purpose of this study is to determine the role of financial literacy in making individual investment decisions. The results of logit- and tobit-regression estimation show that the investments of Russian citizens in stocks, bonds and mutual funds are mainly limited by a high degree of financial risk aversion, and not by an insufficient level of financial literacy. Expectations do not affect the choice of financial instruments. The refusal of individuals with low tolerance for possible losses to invest in securities market instruments and the preference for bank deposits is a reasonable and rational decision in case of the absence of deep financial competencies. At the same time, this creates unfavorable conditions for the implementation of the long-term savings program developed by the Ministry of Finance of Russia and attracting long-term investment resources by Russian companies in the real sector of the economy in the context of closed access to global financial markets. The active acquisition of cryptocurrencies by respondents with high self-esteem of their own financial competencies, but low incomes and low financial literacy ratings, calculated on the basis of answers to test tasks, generates increased risks of not achieving financial goals. Therefore, it is necessary to pay special attention to the risks of transactions with cryptocurrencies as a part of the implementation of initiatives promoted by the Moscow State University and the Bank of Russia to improve the level of financial literacy and financial culture of Russian citizens. It is proposed to include questions that allow assessing advanced financial competencies and forming the values of variables that can act as instruments for the level of financial literacy in subsequent waves of the survey to develop the information base for further research.
... This is also in line with the argument that people with unstable income source are more likely to save for precautionary motives (Mishra & Chang, 2009). Likewise, studies, have observed financial literacy to have significant positive impact on saving behaviour (Bucher-Koenen and Lusard, 2011, Agnew et al., 2012;Allgood and Walstad, 2016;Brown and Graf, 2013;and Hauff et al., 2020). ...
... Meanwhile, other levels of education have not shown any significant impact on saving behaviour with reference to those with informal education. These observations on the impact of education level are inconsistent with wide literature (Agnew et al., 2012;Allgood & Walstad, 2016;Brown & Graf, 2013;Bucher-Koenen & Lusard, 2011;and Hauff et al., 2020), which suggests the likelihood of someone to save increases with an increase in education levels; hence the hypothesis two (2) is rejected at 95% confidence level. /journals.uonbi.ac.ke/index.php/adfj ...
... Because studies (Asarta et al. 2014;Förster and Happ 2019) have revealed that in some countries gender influences financial and economic knowledge, we surveyed 4 males and 4 females. Other studies have revealed that language and socialization experiences of parents as well as those of the children can influence economic and financial knowledge of young adults (Brown and Graf 2013;Gudmunson and Danes 2011); therefore, we asked respondents about their "own migration experience" 9 . Three of the eight respondents had no migration experience (ME) of their own. ...
... Financial literacy refers to tools that enable individuals to make effective financial decisions (Siegfried & Wuttke, 2021;Benjamin et al., 2020;Brown & Graf, 2013). ...
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This study aimed to investigate the financial literacy level of youth in Saudi Arabia and identify any associations between their financial understanding and demographic characteristics (Seraj et al., 2022). A digital questionnaire was administered to gather data, and 439 responses were deemed appropriate. The regression results revealed that higher levels of financial knowledge among youth are linked to gender, education, and specialization. In contrast, other factors, such as living, marital status, region, and job status, were not significantly related to financial literacy. This study was unique to the Saudi context (Ansari et al., 2023). The study showed the importance of increasing financial knowledge among youth in Saudi Arabia to ensure better financial well-being and avoid future financial distress. It provides policy implications for increasing financial knowledge among youth in Saudi Arabia to promote better financial well-being and avert future financial distress. Recommendations have been made to introduce financial education courses to enhance young individuals’ financial literacy and welfare.
... According to Huston (2010), financial literacy comprises the dimensions of personal financial knowledge and personal finance application, that is, the ability to perform financial skills (Huston 2010). Individuals with higher levels of knowledge and skills should, in principle, be better equipped to make informed decisions and behave responsibly (Barbić, Lučić, and Chen 2019;Brown and Graf 2013;Fernandes, Lynch Jr, and Netemeyer 2014;Gale and Levine 2010;Hilgert, Hogarth, and Beverly 2003), yet studies consistently show that better knowledge and skills contribute negligibly to responsible behavior (Barbić and Lučić 2018;Barbić, Lučić, and Chen 2019;Fernandes, Lynch Jr, and Netemeyer 2014;Hilgert, Hogarth, and Beverly 2003;Mandell and Klein 2009;OECD 2015OECD , 2018a. Therefore, we hypothesize that financial literacy as part of financial capability will positively influence healthy financial behavior. ...
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... Additionally, personal attributes play a crucial role in financial decision-making. Other researchers [6][7][8][9][10]. have identified a strong relationship between characteristics like age, gender, and education level with financial choices. ...
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Financial literacy includes knowledge, as well as attitudes, behaviors, and skills. This research explores how different degrees of financial literacy affect the rationality of financial decisions among university students, utilizing insights from the Delayed Gratification theory. Through the exploration of a moderated mediation model, the research delves into the mediating role of Delayed Gratification. Findings from a detailed survey of 4676 Chinese college students highlight two key points. Firstly, the research indicates that college students' knowledge of finance has a substantial and positive effect on the rationality of their financial actions. Secondly, the findings reveal that Delayed Gratification serves as a partial mediator in the complex link between financial knowledge and the rationality of financial behavior. This research contributes to the existing body of knowledge on financial literacy while also deepening our comprehension of how college students' financial awareness shapes the dynamics of their financial decision-making rationality. The results stress the significance of considering the information students possess and underscore the importance of Delayed Gratification in translating knowledge into responsible financial behavior. Considering the essential importance of financial literacy in managing today's intricate financial environment, this study offers significant insights that could guide educational approaches and initiatives aimed at enhancing the financial health of college students.
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Digital financial literacy has emerged as a key driver for fostering financial inclusion in India. As India has been witnessing rapid digitalization of financial services, digital financial literacy has become an imperative because of it’s transformative potential to spread awareness, knowledge and influence user behaviors towards adoption of digital financial services. The purpose of this study was to investigate relationships between various socio-economic and demographic factors and digital financial literacy variables in both rural and urban areas of India. The study relied on a mix of quantitative surveys and qualitative interviews from the respondents belonging to urban and rural areas spread across eight districts of India. The primary data collected underwent several statistical analyses, including the Chi-Square Test, Cramer’s V, correlation analysis, and multiple regression analysis to examine the relationships between socio-demographic factors and digital financial literacy. The study revealed a strong positive correlation between education, age and income with digital financial literacy, underscoring their substantial impact. In contrast, other socio-demographic factors like occupation and social stratification were found to have lesser influence on the digital financial literacy in view of their weaker correlations. The study revealed that digital financial literacy is gender neutral considering negligible correlation between gender and variables of digital financial literacy. The existence of digital divide between urban and rural areas was evident in the study as the rural population lags in digital financial literacy to their urban counterparts. Regression analysis further validates the predictive significance of age, education, and annual family income on digital financial literacy. The earlier research studies and available literature emphasize mainly supply side factors of digital financial literacy viz. measures taken by Governments, Regulators and Financial institutions. This study, focusing on demand side factors, put special emphasis on social and demographic variables and their degree of influence on digital financial literacy. Key findings emerged from the study identify the socio-demographic factors influencing digital financial literacy and offer insights for policy makers to identify gaps in financial education and design targeted strategies based on socio-demographic parameters for broadening digital financial literacy.
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Motivation The level of financial inclusion has increased markedly in Namibia in recent years. Currently, 78% of the population is considered to be financially included. More importantly, this increase has largely derived from vulnerable groups, including low‐income earners living in rural areas. Although there has been an increase in the rate of financial literacy, there is no formal empirical analysis showing the extent to which improved access to formal financial services is associated with financial literacy. Purpose This article deepens the empirical analysis of financial literacy by simultaneously considering their effects on savings, bank account ownership, and access to credit and insurance in Namibia. We further disaggregated the analysis to consider heterogeneity between men and women, as well as between rural and urban populations. Approach and methods We used data from the Namibia Financial Inclusion Survey of 2017 and the instrumental variable probit model to minimize the bias from possible endogeneity caused by potential measurement error, unobserved variable bias, or reverse causality. Findings The study showed that financial literacy significantly increases the likelihood of people using formal financial products. Failure to adequately control for the associated bias would lead to substantial overestimation of the impact of financial literacy. Estimates from the disaggregated analysis showed that the impact of financial literacy differs significantly between rural and urban populations, as well as between men and women. The effects are higher for males than for females and for rural than urban sub‐samples. Policy implications The positive effect of financial literacy on formal financial products suggests that policy options that promote financial literacy are crucial for improving access to formal financial products, particularly for men and the rural population. These policies could include the introduction of financial literacy programmes in schools in order to enhance personal financial knowledge and participation in the formal financial sector. Emphasis should be placed on the raising of awareness, especially among disadvantaged communities, as to the benefits of owning and operating different financial products and on the inclusion of financial literacy programmes on public television.
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Recent pension reforms in Italy require individuals to decide whether to participate in pension funds, how much to contribute, and how to invest their wealth, raising concerns about their ability to deal with financial matters. Using the Bank of Italy's Survey on Household Income and Wealth (SHIW), our empirical analysis shows that most individuals lack knowledge of basic concepts such as interest rates and inflation. Men, the more educated, and residents in the Centre–North possess higher financial literacy. We also find that financial literacy has a positive and significant impact on the probability of pension plan participation.
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Academic research and policy discussions of credit markets usually focus on borrowing by firms and producers rather than by households, which are typically analyzed in terms of their savings and portfolio choices. The Economics of Consumer Credit brings together leading international researchers to focus specifically on consumer debt, presenting current empirical and theoretical research crucial to ongoing policy debates on such topics as privacy rules, the regulation of contractual responsibilities, financial stability, and overindebtedness. The rapidly developing consumer credit industry in the United States is mirrored by that in Europe, and this volume is noteworthy for its cross-national perspective. Several chapters compare the use of credit markets by households in different countries, while others focus on single country case studies—including consumer credit dynamics in Italy, the role of housing expenditure in the cyclical pattern of borrowing in the United Kingdom, and the use of credit cards by U.S. consumers—to illustrate general insights. Other chapters draw policy lessons from the U.S. experience with bankruptcy regulation and the development of the credit counseling industry. Finally, the book reviews historical, theoretical, and empirical aspects of information sharing, of particular interest in light of the integration of European Union credit markets. ContributorsCarol C. Bertaut, Giuseppe Bertola, Sarah Bridges, Luca Casolaro, Jonathan Crook, Richard Disney, Leonardo Gambacorta, Charles Grant, Luigi Guiso, Michael Haliassos, Andrew Henley, Robert M. Hunt, Tullio Jappelli, Nicola Jentzsch, Marco Pagano, Amparo San José Riestra, Michael Staten, Michelle J. White
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We examine financial literacy in Germany using data from the SAVE survey. We find that knowledge of basic financial concepts is lacking among women, the less educated, and those living in East Germany. In particular, those with low education and low income in East Germany have low financial literacy compared to their West German counterparts. Interestingly, there is no gender disparity in financial knowledge in the East. In order to investigate the nexus of causality between financial literacy and retirement planning, we develop an instrumental variables strategy by making use of regional variation in the financial knowledge of peers. We find a positive impact of financial knowledge on retirement planning.
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We compare levels of financial literacy between the general adult population of New Zealand, people of Māori ethnicity, and people of Ngāi Tahu, a Māori tribe that is providing financial education to its members. While the level of financial knowledge of Māori people is generally lower than for non-Māori (controlling for demographic and economic factors), there is little difference between the financial knowledge of the people of Ngāi Tahu and other New Zealanders. Moreover, we find that financial literacy is not significantly associated with planning for retirement. This could reflect the dominant role of New Zealand's universal public pension system in providing retirement income security.
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The level of financial literacy is not high in Japan. Although a majority of respondents were able to correctly answer a simple question about interest rates, more than half were not able to correctly answer a question about risk diversification. Many respondents stated they did not know the answer to the financial literacy questions, which might indicate that Japanese are very cautious and only answer when confident in their response. Women, the young, and those with lower incomes and lower educational attainment have the lowest levels of financial literacy, and financial literacy increases the probability of having a retirement savings plan.
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We examine financial literacy in the US using the new National Financial Capability Study, wherein we demonstrate that financial literacy is particularly low among the young, women, and the less-educated. Moreover, Hispanics and African-Americans score the least well on financial literacy concepts. Interestingly, all groups rate themselves as rather well-informed about financial matters, notwithstanding their actual performance on the key literacy questions. Finally, we show that people who score higher on the financial literacy questions are much more likely to plan for retirement, which is likely to leave them better positioned for old age. Our results will inform those seeking to target financial literacy programmes to those in most need.
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We examine the relationship between financial literacy and retirement planning in Russia, a country with a relatively old and rapidly ageing population, large regional disparities, and emerging financial markets. We find that only 36% of respondents in our sample understand interest compounding and only half can answer a simple question about inflation. In a country with widespread public pension provisions, we find that financial literacy is significantly and positively related to retirement planning involving private pension funds. Thus, along with encouraging the availability of private retirement plans, efforts to improve financial literacy can be pivotal to the expansion of the use of such funds.
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We use data from the Swedish Financial Supervisory 2010 consumer survey to look at levels of financial literacy and retirement planning in the Swedish population. The results indicate that many adults have low financial literacy. In general, financial literacy levels are lower among the young, the old, women and those with low income or low educational attainment. People who report having tried to plan for retirement have higher levels of financial literacy. In particular, an understanding of risk diversification is strongly correlated with planning for retirement. We relate our findings to features of the Swedish pension system.